To Sell Your Company to Warren Buffett – Think Like an Investor
To most entrepreneurs, that sounds like a pretty attractive idea. Everyone knows that his company, Berkshire Hathaway, Inc., has plenty of money to do the deal. But, of course, that fortune was not built on dumb luck.
For the first twenty years of Buffett’s career, he built wealth through investing, producing one of the best long term track records of any money manager in history. Since then, the focus shifted to
Warren Buffett, chairman of Berkshire Hathaway Inc., speaks during an event marking Business Wire’s expansion into Canada in Toronto, Ontario, Canada, on Wednesday, Feb. 6, 2008. Buffett said a credit crunch isn’t under way and he forecast that the dollar’s value is likely to decline. Photographer: Norm Betts/Bloomberg News
producing value in the companies Berkshire has taken interest in, and the higher growth in Berkshire’s book value per share over time (reflective of all activities, inclusive of canny buys and value-producing activities that generate earnings along the way) relative to growth in Berkshire stock price testifies to the organization’s success in building great companies.
Whether buying publicly-traded companies in the “auction market” or private companies in the “negotiated market”, Buffet is known for effective risk management, a foundation of successful investment.
Of course, no amount of research and due diligence can reveal all risk surrounding investment in a company, so he strives to secure a “margin of safety” in the price he’ll pay. That means that the price is so far below a business’s underlying value that severe loss is improbable.
Still want to sell your company to Warren? Perhaps it’s better to concentrate on thinking like him. The more that you, the owner of a privately-held company, think like Warren Buffett, the higher the price I likely can get for you when I represent your company for sale. (Of course, I’ll help with this)
Berkshire Hathaway will evaluate an investment very carefully, but generally “wants to understand how the enterprise generates cash, how well-managed it is, and whether its customers would still stay loyal even if it raised the prices of its goods and services.” If the company is publicly traded, none of those factors are contingent upon the current price of the stock. Even if privately-held, the same principle applies.
Part of Berkshire Hathaway’s success is due to Buffett’s and partner Charlie Munger’s ability to think like both a businessman and an investor. As Buffett said in the Wall Street Journal,
“being a businessman makes me a better investor, and being an investor makes me a better businessman. Most businessmen limit themselves to their own field, and most investors don’t really think about businesses. And, most businessmen are semi-oblivious to the yardsticks other people use outside that field.”
When I take on a client, I help them think like an investor, too, so that we can identify ways in which to improve the company’s attractiveness, and reduce risks to acquirers. We do not want prospective buyers of your company to feel the need to make a “low ball” offer to account for unknown risk.
